He v Shanahan as Liquidator of Eastern Source Construction Pty Ltd (in Liq) - [2018] FCCA 2684

FEDERAL CIRCUIT COURT OF AUSTRALIA

HE v SHANAHAN AS LIQUIDATOR OF EASTERN SOURCE CONSTRUCTION PTY LTD (IN LIQ) & ANOR

[2018] FCCA 2684

Catchwords:
BANKRUPTCY – Application to set aside a Bankruptcy Notice based on a cross-claim etc. – whether a subrogated claim to lodge a proof of debt is a cross-claim etc. under s.40(1)(g) of the Bankruptcy Act 1966 – the nature of the subrogated right.

Legislation:

Bankruptcy Act 1966 (Cth), ss.40, 41.

Corporations Act 2001 (Cth) s.553C

Cases cited:

Bhagat v Global Custodians Limited [2002] FCAFC 51

Tu v Chang (No. 2) [2016] FCA 1568

Ebert v the Union Trustee Company of Australia Limited [1960] 104 CLR 346

Gomez v State Bank of New South Wales [2002] FCAFC 101

Guss v Johnstone (2000) 171 ALR 598

Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) [2018] WASCA 163

Moree Plains Council v Goater [2016] FCAFC 135

Re Judd; Ex Parte Pike [1924] NSWStRp 59; (1924) 24 SR (NSW) 537

Applicant:

GAOGENG HE

First Respondent:

SHANAHAN AS LIQUIDATOR OF EASTERN SOURCE CONSTRUCTION PTY LTD (IN LIQ)

Second Respondent:

EASTERN SOURCE CONSTRUCTION PTY LIMITED (IN LIQ) ACN 159 600 398

File Number:

SYG 924 of 2018

Judgment of:

Judge Altobelli

Hearing date:

19 July 2018

Date of Last Submission:

4 October 2018

Delivered at:

Wollongong

Delivered on:

6 December 2018

REPRESENTATION

Counsel for the Applicant:

Mr Lee

Solicitors for the Applicant:

Ren Zhou Lawyers

Counsel for the Respondents:

Mr Angyal SC

Solicitors for the Respondents:

Results Legal Solutions Pty Ltd

ORDERS

The Application filed 4 April 2018 be dismissed.
The Applicant pay the Respondents’ costs as agreed or as assessed.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT SYDNEY

SYG 924 of 2018

GAOGENG HE

Applicant

And

SHANAHAN AS LIQUIDATOR OF EASTERN SOURCE CONSTRUCTION PTY LTD (IN LIQ)

First Respondent

EASTERN SOURCE CONSTRUCTION PTY LIMITED (IN LIQ) ACN 159 600 398

Second Respondent

REASONS FOR JUDGMENT

Introduction

These Reasons for Judgment explain why the Court has dismissed an Application filed 4 April 2018 which sought to set aside a Bankruptcy Notice (number 222554).

Background

The Applicant was named in a Bankruptcy Notice issued on 19 March 2018 by the First Respondent, who is liquidator of the Second Respondent Company; Eastern Service Construction Pty Limited. The Bankruptcy Notice claims a debt owed of $46,117.37. This is based on a costs order made by consent on 13 March 2018, by Black J in the Supreme Court of New South Wales. Those proceedings were in relation to an application by the Applicant to terminate the winding up of a company known as Dong Yuan Investment Pty Limited.
The Applicant was the sole director and shareholder in this company. The Second Respondent Company was joined to the Applicant’s application to terminate the winding up. The Second Respondent Company obtained the benefit of the costs order against the Applicant.
The Applicant was the guarantor of the debt owed by the Second Respondent Company to Holcim (Australia) Pty Limited pursuant to a Deed of Guarantee and Indemnity dated 31 January 2014.
When the Second Respondent Company went into liquidation it owed Holcim $128,046.57. The Applicant discharged that debt on behalf of the company, in his capacity as guarantor.
At the time of liquidation, the company’s only asset consisted of cash at bank in the sum of $20,765.10.
The debt discharged by the Applicant is greater than the amount sought against him in the Bankruptcy Notice.

The present application

The Applicant contends in the present proceedings that the Bankruptcy Notice should be set aside on the grounds that he has a counterclaim, set‑off and/or cross-claim within the meaning of s.40(1)(g) of the Bankruptcy Act 1966 (Cth) (hereafter referred to as ‘the Act’). This section provides:-
s.40(1) A debtor commits an act of bankruptcy in each of the following cases: …
(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i) where the notice was served in Australia--within the time specified in the notice; or,
(ii) where the notice was served elsewhere--within the time fixed for the purpose by the order giving leave to effect the service;
comply with the requirements of the notice or satisfy the Court that he or she has a counterclaim, set-off or cross-demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counterclaim, set-off or cross-demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.
Another relevant section is s.41(7) of the Act which states:
s.41(7) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counterclaim, set-off or cross‑demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counterclaim, set-off or cross-demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied..
The Applicant’s primary submission is that, having discharged the debt owed by the Second Respondent Company to Holcim, he is entitled to be subrogated into the position of Holcim to make a claim for that amount against the said company.
In the alternative, the Applicant contends that the same facts give rise to a set‑off against the said company.
The Respondents contend that the Applicant has no genuine claim under s.40(1)(g) or s.41(7) because his subrogated right is inchoate and contingent, i.e. at some unspecified time in the future, the Applicant might receive a payment from the First Respondent as liquidators, on an unsecured basis, which may be equal to or greater than the amount of the judgment debt. The subrogated right, therefore, cannot be quantified, and, thus, cannot be relied on in setting aside the Bankruptcy Notice.

The evidence

In the Applicant’s case he relied on the following documents:
a)Affidavit of Gaogeng He, affirmed 3 April 2018; and
b)Case outline document filed 16 May 2018.
In the Respondents’ case, they relied on the following documents:
a)Affidavit of Nicholas Humzy Hancock, affirmed 23 April 2018;
b)Affidavit of John Gervase Shanahan sworn 20 April 2018;
c)Case outline document filed 16 May 2018; and
d)A volume entitled ‘Court Documents – Brief to Angyl SC’ handed up in Court on 19 July 2018.
The following documents were tendered as evidence during the proceedings:
a)Interlocutory Application under ss.471(1A)(d) and 482 of the Corporations Act 2001 (Cth) and rr.36.16(1) and 36.16(2)(b) of the Uniform Civil Procedure Rules 2005 (NSW) filed 29 November 2016 in the Supreme Court of New South Wales;
b)Settlement documents in relation to the property of 30/1-5 Harrow Road, Auburn; and
c)Orders of 16 March 2017 by Justice Black in relation to the Interlocutory Application under the Corporations Act (above).

The rejection of the Applicant’s case

The Applicant submitted that the definition of what constitutes a set‑off, counterclaim or cross-demand was correctly stated by Bromwich J on 22 December 2016 in Tu v Chang (No. 2) [2016] FCA 1568 at paragraphs 61 and 62:-
[61] The clearest exposition of the meaning of the phrase “counterclaim, set-off or cross-demand” that I have come across is from a textbook, and not from a case. In Keay’s Insolvency: Personal and Corporate Law and Practice (Ninth edition) by Michael Murray and Jason Harris at page 97 [3.315] it is clearly and helpfully stated:
In relation to the meaning of the three terms, “cross‑demand” has a wider meaning than set-off and counterclaim. A set-off provides a defence to a claim, in that it diminishes or wipes out the amount claimed. A counterclaim is not a defence but because it directly answers the claim, it can result in relief being ordered in favour of the counterclaimant against the claimant. A cross‑demand is neither a set-off nor a counterclaim, but a more general term describing a claim which can be specified and which equals or exceeds the amount of the judgment debt.
[62] That clear exposition is in accordance with the long-standing and much cited statement in Re Judd; Ex parte Pike [1924] NSWStRp 59; (1924) 24 SR (NSW) 537 at 539-540:
There is no authority of which I am aware deciding what limits (if any) ought to be placed on the words “counterclaim, set-off or cross-demand”. I think that the Legislature by the word “counterclaim” probably referred to those claims which might be the subject of a counterclaim in equity and by the word “set-off” to those claims which might be the subject of a set-off at common law. The other term “cross-demand”, however, is not a technical term and must in my opinion refer to claims other than those which would be comprised in the two expressions “counterclaim” and “set-off”.
Taking the ordinary meaning of the word itself, I can see no reason why “cross-demand” should not be held to include a claim for unliquidated damages for a tort. The case of Re Griffin; Ex parte Soutar (1 B.C. 29) shows that “cross‑demand” includes a claim for unliquidated damages for breach of contract. In the case of Re Smyth; Ex parte North (3 B.C. 17) a common law action of Smyth v. North is referred to as constituting a cross-demand. I have sent for and perused the papers in this case and here again it appears that the cause of action was a claim for unliquidated damages for breach of contract. Two recent cases in England—In re G.E.B. ([1903] 2 K.B. 340) and In re A Debtor ([1914] 3 K.B. 726)—show that the cross‑demand need not have any connection with the cause of action out of which the judgment debt arose—so much so, that a judgment debtor may even buy up a claim against the judgment creditor in order to have a “cross-demand”. These cases are all in favour of an unrestricted meaning being given to the word.
This Court believes, however, that paragraph 64 is also relevant:-
[64] A key aspect of the requirement of an offsetting claim is that it and the bankruptcy debt must be “mutual and due in the same right”. As was stated by the Full Court in Stec v Orfanos [1999] FCA 457 at [24]:
...where a debtor seeks to set aside a bankruptcy notice on the ground that the debtor has a cross-demand which equals or exceeds the amount of the judgment or order on which the bankruptcy notice is founded, the judgment on the one hand and the cross-demand on the other must be mutual and due in the same right: Re Anderson; Ex parte Alexander [1927] NSWStRp 35; (1927) 27 SR (NSW) 296; James v Abrahams [1981] FCA 46; (1981) 51 FLR 16 at 27. The requirement that the two claims be “in the same right” is directed to the capacities in which the claimants claim. Thus a claim by a judgment creditor personally cannot be answered by a claim against the creditor as a member of a partnership or as an executor or trustee. See Re Wedd; Ex parte Wedd (1961) 19 ABC 36; Re Molesworth (1907) 51 Sol J 653; Vogwell v Vogwell (1939) 11 ABC 83 at 89. But the requirement relevant to the present case is that the claims be mutual; that is that they be of the same kind or nature. Thus joint debts cannot be set off against several debts: Middleton v Pollock (1875) LR 20 Eq 515 at 518...
By analogy with Stec v Orfanos [1999] FCA 457 at [24] one wonders about the validity of a counterclaim, set-off or cross-demand which is entirely contingent on the payment of an unsecured claim at some time in the future of the administration of a company? The aforementioned is surely in an even weaker position than a claim for unliquidated damages referred to in Re Judd; Ex Parte Pike [1924] NSWStRp 59; (1924) 24 SR (NSW) 537 (above). The Applicant is confronted with a specific, tangible, non-contingent debt of $46,117.37 against which he purports to set-off an unspecified, inchoate and contingent claim. It is difficult to see the necessary mutuality.
The Applicant contends, however, that the threshold is nothing more than a prima facie case, and that it is both unnecessary and improper to embark on some form of qualitative comparison of the debt and cross‑claim. Indeed, Counsel submitted that any determination as to the prospects of the Applicant’s cross‑claim, was irrelevant. This submission needs to be carefully examined.
In Ebert v the Union Trustee Company of Australia Limited [1960] 104 CLR 346, the High Court considered the then equivalent to section 40(1)(g). The relevant passage is found at page 350, commencing halfway down the second paragraph: -
The appellant cannot satisfy the Court that a cross demand exists by showing no more than that she propounds one and states how she suggests that she can make it out. In Re Duncan; Ex parte Modlin (1917) 17 SR (NSW) 152; 34 WN 49 Street J said that the debtor need not satisfy the Court that there are reasonable grounds for believing that he will establish his cross action, but only that he has a bona fide claim which he is fairly entitled to litigate. This perhaps is expressed too favourably to the debtor.
In Re A Debtor (1958) 1 Ch 81 Roxburgh J said:
"But not every demand will suffice. A demand made in bad faith would not be good enough. The debtor must satisfy the Court that he has a genuine demand … but in my opinion a demand must be more than bona fide: the Court must be satisfied that it has a reasonable probability of success" (1958) 1 Ch, at p 99.
Perhaps the standard may be expressed by saying that the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a Court trying the issues that are involved in his counter-claim, set-off or cross demand.
What the appellant put before the Bankruptcy Court does not reach this standard but it is not necessary to discuss the material that appears from the affidavit because we think the thesis on which her case rests is clearly outside s. 52 (j).
Dixon CJ, McTiernan J and Windeyer J dismissed the appeal, finding that the evidence did not establish the asserted cross‑demand.
The High Court in Guss v Johnstone (2000) 171 ALR 598 also considered section 40(1)(g) and 41(7) of the Act. The Court, consisting of Gleeson CJ, Gaudron J, McHugh J, Kirby J and Callinan J, stated at paragraphs 39 to 40: -
[39] In Vogwell v Vogwell[5], Latham CJ said, in relation to a corresponding provision:
“[T]he authorities show that the matter to which the Court looks is this, - whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate."
[40] The state of satisfaction referred to in s.40(1)(g), and s.41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.
Whilst Vogwell was not referred to in Ebert, Ebert was certainly referred to in Guss.
The Full Court of the Federal Court in Bhagat v Global Custodians Limited [2002] FCAFC 51 referred to the above cases at paragraphs 52 to 53: -
[52] In determining whether a judge in bankruptcy should entertain an application to set aside a Bankruptcy Notice, the judgment debtor, if he or she is to discharge the necessary onus, must satisfy the Court that there is “a reasonable probability of success”: In re A Debtor [1958] 1 Ch. 81 at 99 per Roxburgh J. There must be evidence “that the debtor had … some reasonable ground for bringing his action”: Re Cox (1934) 7 ABC 98 at 100-101. In Vogwell v Vogwell (1939) 11 ABC 83, the question was asked whether it would be just to allow the proceedings which the debtor sought to agitate to proceed to a determination before the bankruptcy proceedings were allowed to continue. More recently, the exercise has been described in the High Court as a:
“…weighing up of considerations as to the legal and factual merit of the claim relied upon by the debtor and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.”
Guss v Johnstone (2000) 171 ALR 598 at 606.
[53] Counsel for Global submitted, quite correctly, that the mere production of a statement of claim in an action that pleads facts which, if proved, would support a claim, has long been held to be insufficient: “[a] statement of claim is no evidence of anything”: In re Foster, Ex parte Basan (1885) 2 Morr 29 at 33 per Brett MR: see also Re Cox (supra) at 101 and Re Verma; Ex parte Deputy Commissioner of Taxation (1985) 4 FCR 181 at 187. It is not even sufficient for a debtor to file an affidavit which merely propounds a claim and states how the debtor proposes to establish it: Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 at 350. There is an obligation on the debtor to adduce evidence that provides reasonable grounds for the institution of proceedings Vogwell v Vogwell (supra) at 85 per Lathan CJ. The task that Mr Bhagat faced was an onerous task. He has raised serious allegations but has not placed before the Court the material (if indeed such material exists) that would justify a Bankruptcy Court from interfering with the judgment that founded the Bankruptcy Notice.
One month later, the Full Court of the Federal Court in Gomez v State Bank of New South Wales [2002] FCAFC 101 adopted an almost identical approach to Bhagat (above).
More recently, in Moree Plains Council v Goater [2016] FCAFC 135 the Full Court of the Federal Court stated at paragraph 55: -
The trial judge correctly identified the principles governing the determination of the question whether he could be satisfied that Mrs Goater, as the debtor, had a counter-claim, set-off or cross demand under s.40(1)(g) of the Act. However, in our opinion, his Honour erred in his consideration and determination of that question. In substance, his Honour considered that Mrs Goater’s statement of claim, as filed in the District Court, established a genuine claim with reasonable prospects of success. But he did not consider the legal, and particularly, the factual merit of her claim. Thus, he could not have weighed those considerations with the justice of allowing the bankruptcy proceedings to continue: Guss 171 ALR at 606 [40].
The Respondents, quite correctly, invited the Court to closely consider the nature of the Applicant’s rights that are sought to create a cross‑claim. The Applicant’s rights are those rights subrogated to Holcim’s rights. The Applicant stands in the shoes of Holcim and enjoys, and can exercise Holcim’s rights in the liquidation of the Second Respondent Company. Holcim is a creditor of the said company. Its rights, therefore, are those of an unsecured creditor, i.e., to prove that debt in the insolvency of the company, and share pari passu with other creditors. The Applicant’s rights are no greater than Holcim’s rights.
The Applicant contends that its cross‑claim, under ss.40(1)(g) and 41(7) of the Bankruptcy Act 1966 (supra) has a value of $128,046.47. In reality, the Applicant’s subrogated right has a value of between nil and $128,046.47, depending on the dividend that is declared by the First Respondent.
The evidence before the Court, found in the First Respondent’s Affidavit sworn 11 May 2018, is that the Second Respondent’s only asset is a claim for $2,786,186 against Dong Yuan Investment Pty Limited (in liquidation) which is currently before the Supreme Court of New South Wales to determine if the former company has a constructive trust over the assets of the latter company. The claim is being defended by the other liquidator. The First Respondent deposes to being uncertain as to what the Second Respondent Company can expect to receive from these proceedings. Moreover, the First Respondent deposes to the Second Respondent having incurred costs of $6,877 to date, and that his work in progress relating to the administration of the liquidation is $97,152.

The Court must weigh up the legal and factual merit of the Applicant’s claim, and the justice of allowing the bankruptcy proceedings to go ahead, or requiring the First Respondent to await the determination of the claim. The Court’s responsibility is greater than that submitted on behalf of the Applicant. It is not just a question of whether there is a prima facie case. The legal and the factual merits of the Applicant’s claim must be considered. In this regard the Court accepts the Respondent’s submission that the Applicant’s claim is contingent or inchoate. It is not only contingent on the outcome of litigation between the two liquidators, but even then it is contingent on sufficient funds being available to pay the Applicant, as a subrogated creditor of the Second Respondent Company, an amount equal to or greater than the debt owed by him. In this regard, it is an inchoate claim.
The Applicant’s claim under ss.40(1)(g) and 41(7) must, therefore, fail, and this outcome is independent of whether the Applicant’s right is characterised as a set‑off, counter‑claim, or cross‑demand, and whether it arises at law, or in equity.
In this regard the Applicant conceded, quite correctly, that s.553C of the Corporations Act 2001 (Cth) does not apply. As for the claim of equitable set off, shortly before it was intended to give Judgment on 5 October 2018, Counsel for the Applicant referred the Court to the decision of the Supreme Court of Western Australia – Court of Appeal in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liquidation) [2018] WASCA 163 (21 September 2018). The relevant passages appear to be [139] – [177]. This does not assist the Applicant’s case. Even in equitable set-off there needs to be a mutuality between the debt and the amount to be set-off. For reasons already indicated, that is not present in this case. There can be no mutuality between a subrogated contingent claim and a non-contingent order for costs.
The Court’s conclusion in this matter is further strengthened by an acceptance of the Respondent’s supplementary submission provided on the day of the Hearing. The Applicant could have set up any claim he had, during the proceedings that resulted in the making of the costs order against him by Black J. It will be recalled that the Applicant consented to the costs order against him. He could have, however, in negotiating the settlement of those proceedings, asserted his claim to be subrogated to Holcim’s claim against the Respondent. The subrogated claim, putting aside for on moment its contingent nature, was significantly greater than the costs order made against him.
The Second Respondent has the benefit of an order for costs, indeed an order for costs consented to by the Applicant. It should not, in the circumstances, have to wait an indeterminate time for the possibility of payment.
The Applicant’s claim fails, and the Application filed 4 April 2018 should be dismissed, with the Applicant to pay the Respondent’s costs, as agreed or as assessed.

I certify that the preceding thirty-five (35) paragraphs are a true copy of the reasons for judgment of Judge Altobelli

Date: 6 December 2018